Light Touch Administrations. What are they and how will they work?
Our Insolvency Practitioners Point Out That the ICAEW has Some Concerns About Light Touch Administrations
Right at the start of the current crisis, we reported how thousands of firms went from being profitable, going concerns to being unable to pay their debts, almost overnight. A range of significant Government interventions focused on preserving workforces, deferring liabilities and improving access to cash has helped. However, as we near ‘the end of the beginning’ with the easing of lockdown coming into view and some sort of phased return to work, there is a view that these measures are only likely to have ‘kicked the can of debt down the road’ and that huge numbers of insolvencies are inevitable. This has prompted talk of a Light Touch form of Administration, designed to restore the administration procedure to its rehabilitative roots, at a time when, perhaps, it is most needed.
In this article, our insolvency practitioners look at the arguments in favour of light touch administrations, but also point out concerns, as highlighted recently by the ICAEW. We conclude by suggesting that the CVA could have an important role to play during the Coronavirus crisis.
What is Light Touch Administration?
A light-touch administration allows company directors to file for administration but retain day-to-day control, rather than ceding power to insolvency practitioners. It has been said that the process is experimental and is intended to help protect companies from creditors during the Coronavirus pandemic and its aftermath
R3 points out, in fact, that light touch administration isn’t new, and that the light touch element of it derives from IPs devolving certain management powers back to the directors under paragraph 64 (1) of schedule B1 of the Insolvency Act, which states that:
‘A company in administration or an officer of a company in administration may not exercise a management power without the consent of the administrator’.
A lighter touch administration was used, for example, with Debenhams, where although administrators have been appointed to the company, the existing management remained in place under their supervision. However, it is probably fair to say that the procedure has been designed with the needs of SMEs in mind, with the aims of minimising court involvement and keeping costs low.
On the face of it, the use of light touch administration seems to be exactly what is needed in the current situation, with a need to promote rescue and save as many businesses as possible. However, the ICAEW have concerns about IPs delegating powers to Directors in Light Touch Admins, and it is worth exploring these concerns.
The ICAEW’s Concerns About Light Touch Administrations
A Light Touch Administration implies that creditors will be accommodating enough during the process so that the pain of losses is shared as sensibly and fairly as possible, enabling fundamentally sound business to carry on. It is unlikely that all creditors will be prepared to look at things this way, and the ICAEW also has concerns about light touch administrations.
- The ICAEW points out that “whilst in practice it can be common for administrators to involve directors in ongoing trading, there is a risk that in the present lockdown scenario, IPs may end up handing too much power back to directors.” The ICAEW, therefore, would caution its member insolvency practitioners “against the widespread use of this process.” Essentially, the ICAEW sees a significant potential risk to IPs from giving too much control back to directors.
- They go on to suggest that “a template agreement that we have seen doesn’t necessarily cover all the practical issues that may arise, including those around funding and access to bank accounts, and there may be additional risks to IPs in relation to health and safety and GDPR.”
- It may be difficult for IPs, in the current circumstances to be able to make a reasoned judgement about the skills and motives of directors that they are approached by for a light touch style of administration, particularly if the communication has largely been carried out remotely.
- Responsibility for the conduct of any insolvency appointment falls to the officeholder and there is a significant potential risk to an IP if they commit to agreements that allow the directors to enter into transactions on their behalf. While financial limits could limit any exposure, there’s also the risk that some directors may well take advantage of the current constraints and it will be left to the IP to pick up the pieces.
In other words, although light touch administrations look to be a potential saviour right now, there are still key issues to consider, not least the appropriate level of control and oversight that an IP needs to exert.
An Alternative Does Exist – the Company Voluntary Arrangement
Our view has always been and remains that the UK cannot afford to lose huge numbers of companies as a result of the pandemic, and Insolvency Practitioners have an important role top play in this process. If light touch administration isn’t appropriate, we believe that the Company Voluntary Arrangement might prove to be a good solution for some companies.
We believe CVA’s could enable Companies to survive, by effectively “mothballing” them until better times return. Click here for our quick guide to CVAs.
Two key points are:
- Suppliers and employees will be bound by the CVA, but will get the best prospect of recovering their losses if the Company still exists and can be quickly kick-started once business returns.
- The CVA would seek to repay creditors and employees out of future profits, in the meantime employees can claim arrears of pay, redundancy and other benefits from the Government which will remove the short-term burden on the Company.
These are unprecedented times for businesses and people everywhere. Without appropriate measures from Insolvency Practitioners, on the back of all the Government intervention, then we will witness huge swathes of liquidations from which the UK’s business base will take many years to recover from.